Primary residence, 100% equity -- now what?

Question

Need some good advice.  I have a 150K home that we paid off.  I also have a duplex that is nearly remodeled and is worth about 110K with a 50K mortgage.

I have no desire to mess with the duplex situation just yet -- one side is rented, and the other soon will be.  The good cash flow numbers are good at that point.

But as for sitting on that amount of equity in my primary residence, I've begun to think about options for putting that equity to work in some way. Granted, I do enjoy living in a nice house with no payment.  But, I'm wondering if I'm really doing the smartest thing with my primary equity.

I've considered renting out my primary residence and buying a "new" house to live in and perform some rehab/sweat equity on.  After giving the SF rental market a once-over, I believe I could get about 1600 or 1700 in rent for it.  It seems like using a portion of that income to help pay for another house could work.  My thinking is that getting a tenant in my current house could conceivably pay the mortgage/insurance/taxes on another house.  Would that option make any sense?

By the way, I've read the cap gains posts with interest relative to renting out one's primary home... and this might kill my idea right there...?

Any better ideas or input will be GREATLY appreciated....THANKS!

Steve Babiak · Answer

The general strategy with down payments is: as little as possible to get the deal and the financing.  The smaller the down money, the more "cash" you'll have to buy another.

Steve Babiak · Answer

If you are going to get financing on your current residence, owner occupied interest rates are better than non-owner occupied (rental) interest rates.  So don't make it a rental until after you take out financing on it.  Then the mortgage interest on your rentals is deductible as well as with a lower interest rate (you get to keep more of the rent).

Thom H. · Answer

Not knowing your entire situation makes it hard to answer that one Kurt. It's really about your personal comfort level and your objective. It'll also depend on the deals you can find. It sounds like you've taken a buy and hold stance with your duplex.  Im assuming this based on the amount you've been able to pay down (great job by the way). Since you're new to this game, I would caution you to take it methodically. Get a good deal or two under your belt and build your portfolio with good properties that make money. It's a long term game if you're buying to hold and build cash flow. If you're flipping, it's a whole different game. Either way, be sure to setup a good rainy day reserve fund. Remember, the more units you have the more chances for things to break. I'd recommend setting aside 3-6 months of normal expenses for all of your units, until you have a few years of experience under your belt. That way if Murphy (Murphy's Law!) shows up, you're prepared. And Murphy eventually always shows up!

I've been at this for a few years now. I started the same way as you. I paid off my house and started buying rentals with my equity line. I am a pretty conservative guy, and a buy and hold kind of investor. This has been my approach and it's always served me well. I'm at twenty-seven units and counting, doing exactly what we're discussing.

Best of luck! You're well on your way! I congratulate you for what you've already accomplished.

Kurt F. · Answer

Steve, Thom , David, Greg:  Thanks for the input.

@ David -- your post lays out a thoughtful approach -- thanks for taking the time to write it...very helpful.  If I can ask another question based on your post....   when you say to use the money from my primary as down payments on additional properties -- are you thinking I should look at buying more than one with that amount of money (120K or so)?  How much would you want in reserves (as Greg has noted)?  I realize there would be many variations and ways to go, but just off the top of your head, how many properties would you put money down on if you were in my financial shoes?

Greg Turnquist · Answer

If you refi the primary, be sure to also set aside enough cash reserves to handle bumps in the road like vacancy, unexpected repairs, etc.

David Beard · Answer

This is a no brainer.  Stay in the home you enjoy and refinance your residence at 80% LTV to lock in these ridiculously low 30 yr fixed rates.  Use the funds as down payments to purchase additional properties, locking in ridiculously low interest rates yet again.   You'll have a cash flow machine in no time.  Of course, you'll lose a little interest in the short term until you're fully invested, but you'll recoup it 10 times over.  You can also use Fannie Mae's Delayed Financing Rule to pay cash for the purchase/rehab of the new properties, then immediately do cash-out refinance after rehab, into 30yr fixed, based on the new ARV.

If  you're a new landlord, you will need to be able to carry the PITI of all these properties in your debt ratio until you have 2 years of experience.  If you cannot carry additional loans and keep your DTI ratio below the max of 40-45%, you can try to find a local bank portfolio lender that will work with you for now on something like a 5yr note (25-30yr amort), and hopefully finance out to 30yr conventional fixed loans in a couple of years when you have the requisite experience (and hopefully rates are still low)

I wouldn't go the HELOC route unless you're planning to flip and the revolving line of credit is useful and will be paid down on a regular basis.  Financing long term investments with a floating rate loan is far too dangerous.

Thom H. · Answer

Consider an equity line on your primary residence. Get you former mortgage company to open up as much credit as possible. They should be willing, given your credit history with them must be good, given your paid up position on your primary residence. You can stay in your home, and use that equity line to finance your next rental. The equity line should have a great rate at this time.

Primary residence, 100% equity -- now what?

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